To The Moon

Stocks reacted in a fairly neutral way after the Federal Reserve’s historically significant decision to jumpstart the rate cutting cycle with a 0.5%-point cut. But the real follow-through came on the day after the Fed meeting, perhaps after everyone slept on it. The S&P 500 surged 1.7% to close at a new record high on Thursday, September 19 (the first since July 16). The index is now up over 20% for the year.

High to even higher

The key takeaway from the Fed meeting was that they are not willing to tolerate the unemployment rate moving much higher — their projections capped the unemployment rate at 4.4% (it’s currently at 4.2%). The Fed’s essentially putting a floor under the labor market.

Unlike in prior rate cutting cycles, the big rate cut wasn’t a “panic cut.” Safe to say we’re not in the middle of a recession, nor is one imminent over the next few months. Amongst other things, the August retail sales report showed that online sales grew at an annualized pace of 15% over the past three months. Layoffs are also relatively low.

JP sure can pump

Notably, Fed Chair Powell said the time to support the labor market is when it’s strong, not when you begin to see layoffs. In other words, the large cut was about risk management, with the Fed looking to get ahead of deteriorating labor market data.

The good news is that the Fed has room to support the labor market because inflation has eased a lot. An underrated factor here is lower energy prices. Beyond headline inflation, higher energy prices can even feed into core inflation. For now, investors appear to be taking the Fed’s word that they’re putting a floor under the labor market, and therefore the economy.

Equity markets have been reflecting this since last week, after a Wall Street Journal report published on September 12 suggested the Fed was considering a big cut. The massive rally on Thursday capped what was already happening. From September 11 through September 19, the S&P 500 rose 3%. But mid- and small-cap stocks, which are even more geared to economic growth, outperformed.

IWM to catch up with big bros soon

The Russell mid cap index rose over 4% during this period, while the Russell 2000 small cap index rose over 7%. As you can see above, these still lag their large cap counterpart year to date, but we believe there’s potentially more follow-through to come, especially with the Fed backstopping the economy.

A stronger economic growth expectations playing out within large-cap sectors. Cyclical sectors, including energy, communications, industrials, consumer discretionary, materials, and financials all outperformed the broad index, whereas more defensive sectors like consumer staples underperformed.

QQQ to ATH next 🤫 

Do keep in mind that we could yet see some volatility over the next several weeks as late September and October of an election year are a seasonally weak period for equities. But going forward, we have some strong tailwinds for markets (and the economy). If nothing else, momentum begets momentum. And we have a lot of that now.

⚠️ Trading tips: daily dip buying proves lucrative so far. However late September could be a volatile time based in historical data, however it could be an opportunity to accumulate shares during each dip and hold them until Q4.

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